GUCCI PROFITS DROP LESS THAN EXPECTED, AND ANALYSTS APPLAUD
Byline: Samantha Conti
MILAN — Gucci Group reported first-quarter earnings fell 10.2 percent as sales dipped 1.4 percent, but nevertheless impressed analysts with its better than expected results.
Net income in the three months ended April 30 came to $43.1 million, or 72 cents a share diluted, against $48 million, or 78 cents, a year ago. Revenues dropped to $250.7 million from $254.3 million, dented by currency fluctuations and Asian problems but bolstered by solid performances in ready-to-wear and watches.
“I think these results are fantastic,” said Claire Kent, a luxury goods analyst with Morgan Stanley in London. Her firm had projected an 18.8 percent drop in net income to $39 million, or 65 cents a share, and a 5.6 percent drop in revenues to $240 million.
“The first-quarter results were better than the market consensus and higher than our projections,” echoed Cedric Magnelia, an analyst with Credit Suisse First Boston in London, who noted he also had been looking for $240 million in sales.
Kent further enthused, “Gucci’s management has done a really amazing job — and with such a difficult base. Last year’s first quarter was significantly better than the three that followed. If Gucci can achieve solid results under these circumstances, imagine what it will do once the yen starts to recover.”
Last year’s first quarter was particularly stellar: Japan’s consumption tax hadn’t yet kicked in, and Asia’s economies were roaring.
Investors in New York also apparently liked the numbers. On a day when the Dow Jones Industrials fell 159.93 points, Gucci shares rose 1 on the New York Stock Exchange to close Thursday at 52.
Gucci chairman and chief executive officer Domenico De Sole said he was “delighted” with the first-quarter figures, showing that Gucci “continues to perform well despite the crisis in Asia.”
Gucci also noted that, in terms of constant currency, sales would have reached $263.2 million — a 3.5 percent increase over last year’s figure. Gucci sales are often penalized by exchange rate factors as the company translates local currencies into dollars for the earnings report.
On Thursday, the company also announced a dividend of 40 cents per common share for the fiscal year ended Jan. 31. A year earlier, the firm paid a 30-cent dividend.
The first-quarter results came on the heels of other Gucci news this past weekend, when Prada announced that it had acquired a 5 percent stake in Gucci. Prada’s general manager Patrizio Bertelli said the holding was acquired because it represented a good investment and he hoped it could lead to cooperative moves by Prada and Gucci in such areas as real estate and distribution. But, he insisted, he had no intention of making a takeover bid for Gucci.
How Gucci’s first-quarter results impressed Bertelli could not be learned, however. A Prada spokeswoman said Thursday that Bertelli now has issued a blanket “no comment” on anything that has to do with Prada’s Gucci stake.
A breakdown of Gucci’s sales by category showed that ready-to-wear was a star, rising 56.5 percent in the quarter to reach $26.6 million.
De Sole said the sharp rise in rtw was due to three main factors. “The brand is doing very well, and the company is pushing ready-to-wear on a strategic level,” he said. “It is expanding and refurbishing stores around the world, and dedicating more space to the category. Historically, ready-to-wear is not sold to tourists; it’s much more driven by the local market, so it was not as hurt by the Asian crisis as leather goods.”
Kent of Morgan Stanley said she expects Gucci’s ready-to-wear business to grow even more. “Sales of rtw have not yet benefited from the new, expanded space in Gucci stores around the world. I think growth in this category will continue to drive sales.”
Watches, too, performed well, funneling $43.9 million into Gucci’s coffers. Gucci acquired its watch licensee Sevrin Montres — now known as Gucci Timepieces — last year. This was the first time results of that company were consolidated in the Gucci Group’s balance sheet.
Other product categories did not fare as well in the quarter. Sales of leather goods dropped 28.4 percent to $113.9 million; footwear skidded 11.2 percent to $40.6 million, and sales of ties and scarves fell 31 percent to $5.8 million.
Breaking down sales by region, Gucci said Asia slid 16.2 percent to $99.6 million, and the U.S. fell 2 percent to $74.1 million. De Sole said Hawaii was responsible for the decrease in the U.S. sales: Last fall, Gucci pulled out of a duty-free location there. Sales in Europe shot up 23.6 percent to $68.2 million, and sales in the rest of the world rose 85.4 percent to $8.8 million.
As for upcoming prospects, Magnelia of Credit Suisse First Boston said, “The future hinges on the yen: If it reaches 160 to the dollar by the end of the year, this could be bad for Gucci.”
Between May 1997 and May 1998, the yen weakened from 127 to more than 140 to the dollar. “A weaker yen will hurt the buying power of Japanese tourists, and will hurt Gucci again when the company translates its yen sales back into U.S. dollars,” Magnelia said, adding, though, that first-quarter sales in Japan were still vigorous compared with the rest of Asia.
Paul Gordon, an equities analyst with IMI Sigeco, an investment bank here, said that while the yen’s outlook is “not so good,” the Gucci customer will probably not be badly affected.
“There is still a huge amount of wealth in Japan,” he said. “Gucci also has the advantage of having a large female clientele — many of whom still live at home and are subsidized by their parents.”
In the first quarter, sales from directly owned stores slid 5 percent to $155.3 million, while wholesale sales rose 12.4 percent to $89.5 million.
Royalties dropped 47.3 percent to $5.9 million due to the purchase and subsequent consolidation of the Gucci watch manufacturer. Royalties from other licensees increased 25.5 percent.
Operating profit in the quarter dropped 11.7 percent to $56.6 million, but that was better than analysts’ forecasts of $53.7 million. Operating profit as a percentage of net revenue dipped to 22.6 percent from 25.2 percent, analysts said, because of the consolidation of the watch manufacturer.
Gross margin in the quarter, though, increased to $160 million, or 63.8 percent of revenue, from $159.7 million, or 62.8 percent of revenue, a year ago.
The percentage increase, analysts said, is a result of Gucci’s ever-tighter control over its distribution network and more directly owned stores. In the first quarter, Gucci purchased its franchise business in Guam and took a majority stake in its Taiwan operation. In the second quarter so far, it has purchased its Korean franchise operation.
By spring of next year, Gucci is planning to open some 37 directly owned and franchised stores. The company will open six in Japan alone, one of which is a 8,200-square-foot store in Tokyo’s Aoyama district. Gucci also plans to unveil a 8,748-square-foot unit on Via Montenapoleone here in July. In the U.S., the firm plans to open stores in Atlanta, Aspen, Beverly Hills, Las Vegas and Bal Harbour, Fla.
Also in the first quarter, Gucci purchased 1.1 percent of its shares as part of a 3 million share buyback plan announced last year. It has so far completed two-thirds of the plan. “We believe that a buyback of Gucci’s shares at current levels continues to be an excellent investment for the company,” De Sole said.
